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Ally Financial Inc. - Quarter Report: 2018 September (Form 10-Q)

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018, or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to                         
Commission file number: 1-3754
ALLY FINANCIAL INC.
(Exact name of registrant as specified in its charter)
Delaware
 
38-0572512
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Ally Detroit Center
500 Woodward Ave.
Floor 10, Detroit, Michigan
48226
(Address of principal executive offices)
(Zip Code)
(866) 710-4623
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ                    No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ                    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
  
Accelerated filer o
  
Non-accelerated filer o
 
Smaller reporting company o
 
  
(Do not check if a smaller reporting company)
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨                    No þ
At October 30, 2018, the number of shares outstanding of the Registrant’s common stock was 413,081,733 shares.


Table of Contents
INDEX
Ally Financial Inc. • Form 10-Q

 
 
Page
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


 
PART I — FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
Condensed Consolidated Statement of Comprehensive Income (unaudited)
Ally Financial Inc. • Form 10-Q



 
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
 
2018
 
2017
 
2018
 
2017
Financing revenue and other interest income
 
 
 
 
 
 
 
 
Interest and fees on finance receivables and loans
 
$
1,708

 
$
1,486

 
$
4,898

 
$
4,301

Interest on loans held-for-sale
 
4

 
—

 
10

 
—

Interest and dividends on investment securities and other earning assets
 
198

 
157

 
562

 
437

Interest on cash and cash equivalents
 
18

 
11

 
50

 
23

Operating leases
 
368

 
434

 
1,124

 
1,465

Total financing revenue and other interest income
 
2,296

 
2,088

 
6,644


6,226

Interest expense
 
 
 
 
 
 
 
 
Interest on deposits
 
462

 
285

 
1,212

 
766

Interest on short-term borrowings
 
29

 
34

 
101

 
94

Interest on long-term debt
 
451

 
416

 
1,296

 
1,257

Total interest expense
 
942

 
735

 
2,609


2,117

Net depreciation expense on operating lease assets
 
247

 
272

 
785

 
982

Net financing revenue and other interest income
 
1,107

 
1,081

 
3,250


3,127

Other revenue
 
 
 
 
 
 
 
 
Insurance premiums and service revenue earned
 
258

 
252

 
753

 
720

Gain on mortgage and automotive loans, net
 
17

 
15

 
19

 
65

Other gain on investments, net
 
22

 
23

 
37

 
73

Other income, net of losses
 
101

 
91

 
307

 
307

Total other revenue
 
398


381

 
1,116


1,165

Total net revenue
 
1,505

 
1,462

 
4,366


4,292

Provision for loan losses
 
233

 
314

 
652

 
854

Noninterest expense
 
 
 
 
 
 
 
 
Compensation and benefits expense
 
274

 
264

 
872

 
814

Insurance losses and loss adjustment expenses
 
77

 
65

 
241

 
278

Other operating expenses
 
456

 
424

 
1,347

 
1,249

Total noninterest expense
 
807

 
753

 
2,460


2,341

Income from continuing operations before income tax expense
 
465

 
395

 
1,254


1,097

Income tax expense from continuing operations
 
91

 
115

 
280

 
350

Net income from continuing operations
 
374

 
280

 
974


747

Income (loss) from discontinued operations, net of tax
 
—

 
2

 
(1
)
 
1

Net income
 
374

 
282

 
973


748

Other comprehensive (loss) income, net of tax
 
(133
)
 
48

 
(531
)
 
144

Comprehensive income
 
$
241


$
330


$
442


$
892

Statement continues on the next page.
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

3
Table of Contents
Condensed Consolidated Statement of Comprehensive Income (unaudited)
Ally Financial Inc. • Form 10-Q

 
 
Three months ended September 30,
 
Nine months ended September 30,
(in dollars) (a)
 
2018
 
2017
 
2018
 
2017
Basic earnings per common share
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
0.89

 
$
0.62

 
$
2.27

 
$
1.63

Income from discontinued operations, net of tax
 
—

 
—

 
—

 
—

Net income
 
$
0.89

 
$
0.63

 
$
2.26

 
$
1.63

Diluted earnings per common share
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
0.88

 
$
0.62

 
$
2.25

 
$
1.63

Income from discontinued operations, net of tax
 
—

 
—

 
—

 
—

Net income
 
$
0.88

 
$
0.63

 
$
2.25

 
$
1.63

Cash dividends declared per common share
 
$
0.15

 
$
0.12

 
$
0.41

 
$
0.28

(a)
Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers.
Refer to Note 15 for additional earnings per share information. The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

4
Table of Contents
Condensed Consolidated Balance Sheet (unaudited)
Ally Financial Inc. • Form 10-Q

($ in millions, except share data)
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Cash and cash equivalents
 
 
 
 
Noninterest-bearing
 
$
802

 
$
844

Interest-bearing
 
2,970

 
3,408

Total cash and cash equivalents
 
3,772

 
4,252

Equity securities
 
514

 
518

Available-for-sale securities (refer to Note 6 for discussion of investment securities pledged as collateral)
 
24,122

 
22,303

Held-to-maturity securities (fair value of $2,139 and $1,865)
 
2,246

 
1,899

Loans held-for-sale, net
 
425

 
108

Finance receivables and loans, net
 
 
 
 
Finance receivables and loans, net of unearned income
 
126,605

 
122,893

Allowance for loan losses
 
(1,248
)
 
(1,276
)
Total finance receivables and loans, net
 
125,357

 
121,617

Investment in operating leases, net
 
8,578

 
8,741

Premiums receivable and other insurance assets
 
2,291

 
2,047

Other assets
 
5,796

 
5,663

Total assets
 
$
173,101

 
$
167,148

Liabilities
 
 
 
 
Deposit liabilities
 
 
 
 
Noninterest-bearing
 
$
180

 
$
108

Interest-bearing
 
101,199


93,148

Total deposit liabilities
 
101,379

 
93,256

Short-term borrowings
 
7,338

 
11,413

Long-term debt
 
45,542

 
44,226

Interest payable
 
712

 
375

Unearned insurance premiums and service revenue
 
3,020

 
2,604

Accrued expenses and other liabilities
 
2,025

 
1,780

Total liabilities
 
160,016

 
153,654

Contingencies (refer to Note 23)
 
 
 
 
Equity
 
 
 
 
Common stock and paid-in capital ($0.01 par value, shares authorized 1,100,000,000; issued 492,366,900 and 489,883,553; and outstanding 416,590,508 and 437,053,936)
 
21,322

 
21,245

Accumulated deficit
 
(5,716
)
 
(6,406
)
Accumulated other comprehensive loss
 
(781
)
 
(235
)
Treasury stock, at cost (75,776,392 and 52,829,617 shares)
 
(1,740
)
 
(1,110
)
Total equity
 
13,085

 
13,494

Total liabilities and equity
 
$
173,101

 
$
167,148

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

5
Table of Contents
Condensed Consolidated Balance Sheet (unaudited)
Ally Financial Inc. • Form 10-Q

The assets of consolidated variable interest entities, presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, that can be used only to settle obligations of the consolidated variable interest entities and the liabilities of these entities for which creditors (or beneficial interest holders) do not have recourse to our general credit were as follows.
($ in millions)
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Finance receivables and loans, net
 
 
 
 
Finance receivables and loans, net of unearned income
 
$
17,694

 
$
20,623

Allowance for loan losses
 
(123
)
 
(136
)
Total finance receivables and loans, net
 
17,571

 
20,487

Investment in operating leases, net
 
206

 
444

Other assets
 
622

 
689

Total assets
 
$
18,399

 
$
21,620

Liabilities
 
 
 
 
Long-term debt
 
$
11,457

 
$
10,197

Accrued expenses and other liabilities
 
26

 
9

Total liabilities
 
$
11,483

 
$
10,206

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

6
Table of Contents
Condensed Consolidated Statement of Changes in Equity (unaudited)
Ally Financial Inc. • Form 10-Q

($ in millions)
 
Common stock and paid-in capital
 
Accumulated deficit
 
Accumulated other comprehensive loss
 
Treasury stock
 
Total equity
Balance at January 1, 2017
 
$
21,166

 
$
(7,151
)
 
$
(341
)
 
$
(357
)
 
$
13,317

Net income
 

 
748

 


 

 
748

Share-based compensation
 
57

 

 


 


 
57

Other comprehensive income
 

 

 
144

 


 
144

Common stock repurchases
 

 

 


 
(563
)
 
(563
)
Common stock dividends ($0.28 per share)
 

 
(130
)
 

 

 
(130
)
Balance at September 30, 2017
 
$
21,223

 
$
(6,533
)
 
$
(197
)
 
$
(920
)
 
$
13,573

Balance at January 1, 2018, before cumulative effect of adjustments
 
$
21,245

 
$
(6,406
)
 
$
(235
)
 
$
(1,110
)
 
$
13,494

Cumulative effect of changes in accounting principles, net of tax (a)
 
 
 
 
 
 
 
 
 
 
Adoption of Accounting Standards Update 2014-09
 
 
 
(126
)
 
 
 
 
 
(126
)
Adoption of Accounting Standards Update 2016-01
 
 
 
(20
)
 
27

 
 
 
7

Adoption of Accounting Standards Update 2018-02
 
 
 
42

 
(42
)
 
 
 
—

Balance at January 1, 2018, after cumulative effect of adjustments
 
21,245

 
(6,510
)
 
(250
)
 
(1,110
)
 
13,375

Net income
 

 
973

 


 

 
973

Share-based compensation
 
77

 

 

 

 
77

Other comprehensive loss
 

 

 
(531
)
 

 
(531
)
Common stock repurchases
 

 

 

 
(630
)
 
(630
)
Common stock dividends ($0.41 per share)
 

 
(179
)
 

 


 
(179
)
Balance at September 30, 2018
 
$
21,322

 
$
(5,716
)
 
$
(781
)
 
$
(1,740
)
 
$
13,085

(a)
Refer to the section titled Recently Adopted Accounting Standards in Note 1 for additional information.
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

7
Table of Contents
Condensed Consolidated Statement of Cash Flows (unaudited)
Ally Financial Inc. • Form 10-Q

Nine months ended September 30, ($ in millions)
 
2018
 
2017
Operating activities




Net income

$
973


$
748

Reconciliation of net income to net cash provided by operating activities

 

 
Depreciation and amortization

1,280


1,434

Provision for loan losses

652


854

Gain on mortgage and automotive loans, net

(19
)

(65
)
Other gain on investments, net

(37
)

(73
)
Originations and purchases of loans held-for-sale

(889
)

(252
)
Proceeds from sales and repayments of loans held-for-sale

830


236

Net change in

 

 
Deferred income taxes

272


289

Interest payable

338


202

Other assets

(136
)

(57
)
Other liabilities

(9
)

(19
)
Other, net

89


76

Net cash provided by operating activities

3,344


3,373

Investing activities




Purchases of equity securities
 
(652
)
 
(612
)
Proceeds from sales of equity securities
 
715

 
728

Purchases of available-for-sale securities

(5,669
)

(8,410
)
Proceeds from sales of available-for-sale securities

637


2,198

Proceeds from repayments of available-for-sale securities

2,509


2,002

Purchases of held-to-maturity securities

(436
)

(709
)
Proceeds from repayments of held-to-maturity securities

107


32

Purchases of finance receivables and loans held-for-investment

(4,778
)

(3,125
)
Proceeds from sales of finance receivables and loans initially held-for-investment

53


1,323

Originations and repayments of finance receivables and loans held-for-investment and other, net
 
(558
)
 
1,021

Purchases of operating lease assets

(2,991
)

(2,844
)
Disposals of operating lease assets

2,461


4,409

Net change in nonmarketable equity investments

(3
)

(20
)
Other, net

(241
)

(155
)
Net cash used in investing activities

(8,846
)

(4,162
)
Statement continues on the next page.
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

8
Table of Contents
Condensed Consolidated Statement of Cash Flows (unaudited)
Ally Financial Inc. • Form 10-Q

Nine months ended September 30, ($ in millions)
 
2018
 
2017
Financing activities




Net change in short-term borrowings

(4,074
)

(2,500
)
Net increase in deposits

8,063


11,050

Proceeds from issuance of long-term debt

14,756


13,302

Repayments of long-term debt

(12,994
)

(22,376
)
Repurchase of common stock
 
(630
)
 
(563
)
Dividends paid

(179
)

(130
)
Net cash provided by (used in) financing activities

4,942


(1,217
)
Effect of exchange-rate changes on cash and cash equivalents and restricted cash

(2
)

3

Net decrease in cash and cash equivalents and restricted cash

(562
)

(2,003
)
Cash and cash equivalents and restricted cash at beginning of year

5,269


7,881

Cash and cash equivalents and restricted cash at September 30,

$
4,707


$
5,878

Supplemental disclosures

 
 
 
Cash paid for

 
 
 
Interest

$
2,242


$
1,910

Income taxes

21


32

Noncash items

 
 
 
Held-to-maturity securities received in consideration for loans sold
 
26

 
56

Finance receivables and loans transferred to loans held-for-sale

815


1,326

Other disclosures

 
 
 
Proceeds from repayments of mortgage loans held-for-investment originally designated as held-for-sale

18


29

The following table provides a reconciliation of cash and cash equivalents and restricted cash from the Condensed Consolidated Balance Sheet to the Condensed Consolidated Statement of Cash Flows.
September 30, ($ in millions)
 
2018
 
2017
Cash and cash equivalents as disclosed on the Condensed Consolidated Balance Sheet
 
$
3,772

 
$
4,424

Restricted cash included in other assets on the Condensed Consolidated Balance Sheet (a)
 
935

 
1,454

Total cash and cash equivalents and restricted cash as disclosed in the Condensed Consolidated Statement of Cash Flows
 
$
4,707

 
$
5,878

(a)
Restricted cash balances relate primarily to Ally securitization arrangements. Refer to Note 10 for additional details describing the nature of restricted cash balances.
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

9
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



1.    Description of Business, Basis of Presentation, and Changes in Significant Accounting Policies
Ally Financial Inc. (together with its consolidated subsidiaries unless the context requires otherwise, Ally, the Company, or we, us, or our) is a leading digital financial services company and top 25 U.S. financial holding company (FHC) based on total assets, offering diversified financial products and services for consumers, businesses, automotive dealers, and corporate clients. Ally operates with a distinctive brand, an innovative approach, and a relentless focus on our customers. We are a Delaware corporation and are registered as a bank holding company (BHC) under the Bank Holding Company Act of 1956, as amended, and an FHC under the Gramm-Leach-Bliley Act of 1999, as amended. We are one of the largest full service automotive finance operations in the country with a legacy that dates back to 1919, a deep expertise in automotive lending, and a complementary automotive-focused insurance business. Our wholly-owned banking subsidiary, Ally Bank, has received numerous industry awards for its services and capabilities and is one of the largest and most respected online banks, uniquely positioned for the observed shifting trends in consumer banking preferences for digital banking. We offer mortgage lending services and a variety of deposit and other banking products, including CDs, online savings, money market and checking accounts, and IRA products. We also promote a cash back credit card. We have recently integrated a growing digital wealth management and online brokerage platform to enable consumers to have a variety of options in managing their savings and wealth. Additionally, through our corporate finance business, we primarily offer senior secured leveraged cash flow and asset-based loans to middle-market companies.
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (GAAP). Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and that affect income and expenses during the reporting period and related disclosures. In developing the estimates and assumptions, management uses all available evidence; however, actual results could differ because of uncertainties associated with estimating the amounts, timing, and likelihood of possible outcomes. Our most significant estimates pertain to the allowance for loan losses, valuations of automotive lease assets and residuals, fair value of financial instruments, legal and regulatory reserves, and the determination of the provision for income taxes.
The Condensed Consolidated Financial Statements at September 30, 2018, and for the three months and nine months ended September 30, 2018, and 2017, are unaudited but reflect all adjustments that are, in management’s opinion, necessary for the fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements (and the related Notes) included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed on February 21, 2018, with the U.S. Securities and Exchange Commission (SEC).
Significant Accounting Policies
Investments
Our investment portfolio includes various debt and equity securities. Our debt securities include government securities, corporate bonds, asset-backed securities (ABS), and mortgage-backed securities (MBS). Debt securities are classified based on management’s intent to sell or hold the security. We classify debt securities as held-to-maturity only when we have both the intent and ability to hold the securities to maturity. We classify debt securities as trading when the securities are acquired for the purpose of selling or holding them for a short period of time. Debt securities not classified as either held-to-maturity or trading are classified as available-for-sale.
Our portfolio includes debt securities classified as available-for-sale and held-to-maturity. Our available-for-sale debt securities are carried at fair value with unrealized gains and losses included in accumulated other comprehensive (loss) income and are subject to impairment. Our held-to-maturity debt securities are carried at amortized cost and are subject to impairment.
We assess our available-for-sale and held-to-maturity debt securities for potential other-than-temporary impairment. We employ a methodology that considers available evidence in evaluating potential other-than-temporary impairment of our debt securities. If the cost of an investment exceeds its fair value, we evaluate, among other factors, the magnitude and duration of the decline in fair value. We also evaluate the financial health of and business outlook for the issuer, the performance of the underlying assets for interests in securitized assets, and, for debt securities classified as available-for-sale, our intent and ability to hold the investment through recovery of its amortized cost basis.
Once a decline in fair value of a debt security is determined to be other-than-temporary, an impairment charge for the credit component is recorded to other gain (loss) on investments, net, in our Condensed Consolidated Statement of Comprehensive Income, and a new cost basis in the investment is established. The noncredit loss component of a debt security continues to be recorded in other comprehensive (loss) income when we do not intend to sell the security and it is not more likely than not that we will have to sell the security prior to the security’s anticipated recovery. Both the credit and noncredit loss components are recorded in earnings when we intend to sell the security or it is more likely than not that we will have to sell the security prior to the security’s anticipated recovery. Subsequent increases and decreases to the fair value of available-for-sale debt securities are included in other comprehensive (loss) income, so long as they are not attributable to another other-than-temporary impairment.
We amortize premiums and discounts on debt securities as an adjustment to investment yield generally over the stated maturity of the security. For ABS and MBS where prepayments can be reasonably estimated, amortization is adjusted for expected prepayments.

10
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


Our investment in equity securities includes securities that are recognized at fair value with changes in the fair value recorded in earnings, and equity securities that are recognized using other measurement principles.
Effective January 1, 2018, equity securities that have a readily determinable fair value, as well as certain investments that do not have a readily determinable fair value and are not eligible to be recognized using other measurement principles, are recorded at fair value with changes in fair value recorded in earnings and reported in other gain (loss) on investments, net in our Condensed Consolidated Statement of Comprehensive Income. These investments, which are primarily attributable to the investment portfolio of our Insurance operations, are included in equity securities on our Condensed Consolidated Balance Sheet. Refer to Note 6 for further information on our equity securities that have a readily determinable market value.
Our equity securities recognized using other measurement principles include investments in Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock held to meet regulatory requirements, equity investments related to low income housing tax credits and the Community Reinvestment Act (CRA), which do not have a readily determinable fair value, and other equity investments that do not have a readily determinable fair value. Our low income housing tax credit investments are accounted for using the proportional amortization method of accounting for qualified affordable housing investments. Our obligations related to unfunded commitments for our low income housing tax credit investments are included in other liabilities. The majority of our CRA investments are accounted for using the equity method of accounting. Our investments in low income housing tax credits and CRA investments are included in other assets on our Condensed Consolidated Balance Sheet. Our investments in FHLB and FRB stock are carried at cost, less impairment. Our remaining investments in equity securities are recorded at cost, less impairment and adjusted for observable price changes under the measurement alternative provided under GAAP. These investments, along with our investments in FHLB and FRB stock, are included in nonmarketable equity investments in other assets on our Condensed Consolidated Balance Sheet. As conditions warrant, we review these investments for impairment and adjust the carrying value of the investment if it is deemed to be impaired. Investments recorded under the measurement alternative are also reviewed at each reporting period to determine if any adjustments are required for observable price changes in identical or similar securities of the same issuer.
Realized gains and losses on the sale of securities are determined using the specific identification method and are reported in other gain (loss) on investments, net in our Condensed Consolidated Statement of Comprehensive Income.
Derivative Instruments and Hedging Activities
We use derivative instruments primarily for risk-management purposes. We do not use derivative instruments for speculative purposes. Certain of our derivative instruments are designated as accounting hedges in qualifying relationships, whereas other derivative instruments have not been designated as accounting hedges. In accordance with applicable accounting standards, all derivative instruments, whether designated for hedge accounting or not, are required to be recorded on the balance sheet as assets or liabilities and measured at fair value. We have elected to report the fair value of derivative assets and liabilities on a gross basis—including the fair value for the right to reclaim cash collateral or the obligation to return cash collateral—arising from instruments executed with the same counterparty under a master netting arrangement where we do not have the intent to offset. For additional information on derivative instruments and hedging activities, refer to Note 17.
At the inception of a hedge accounting relationship, we designate each qualifying hedge relationship as a hedge of the fair value of a specifically identified asset or liability (fair value hedge); as a hedge of the variability of cash flows to be received or paid, or forecasted to be received or paid, related to a recognized asset or liability (cash flow hedge); or as a hedge of the foreign-currency exposure of a net investment in a foreign operation (net investment hedge). We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objectives for undertaking various hedge transactions. Both at hedge inception and on an ongoing basis, we formally assess whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in the fair values or cash flows of hedged items.
Changes in the fair value of derivative instruments qualifying as fair value hedges, along with the gain or loss on the hedged asset or liability attributable to the hedged risk, are recorded in current period earnings. For qualifying cash flow hedges, the changes in fair value of the derivative financial instruments are recorded in accumulated other comprehensive loss and recognized in the income statement when the hedged cash flows affect earnings. For a qualifying net investment hedge, the gain or loss is reported in accumulated other comprehensive loss as part of the cumulative translation adjustment.
Hedge accounting treatment is no longer applied if a derivative financial instrument is terminated, or if the hedge designation is removed or assessed to be no longer highly effective. For terminated fair value hedges, any changes to the hedged asset or liability remain as part of the basis of the hedged asset or liability and are recognized into income over the remaining life of the asset or liability. For terminated cash flow hedges, unless it is probable that the forecasted cash flows will not occur within a specified period, any changes in fair value of the derivative financial instrument previously recognized remain in accumulated other comprehensive loss, and are reclassified into earnings in the same period that the hedged cash flows affect earnings. Any previously recognized gain or loss for a net investment hedge continues to remain in accumulated other comprehensive loss until earnings are impacted by sale or liquidation of the associated foreign operation. In all instances, after hedge accounting is no longer applied, any subsequent changes in fair value of the derivative instrument will be recorded into earnings.
Changes in the fair value of derivative financial instruments held for risk-management purposes that are not designated as accounting hedges under GAAP are reported in current period earnings.

11
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


Income Taxes
In calculating the provision for interim income taxes, in accordance with Accounting Standards Codification (ASC) 740, Income Taxes, we apply an estimated annual effective tax rate to year-to-date ordinary income. At the end of each interim period, we estimate the effective tax rate expected to be applicable for the full fiscal year. This method differs from that described in Note 1 to the Consolidated Financial Statements in our 2017 Annual Report on Form 10-K, which describes our annual significant income tax accounting policy and related methodology.
Refer to Note 1 to the Consolidated Financial Statements in our 2017 Annual Report on Form 10-K regarding additional significant accounting policies.
Recently Adopted Accounting Standards
Statement of Cash Flows — Restricted Cash (ASU 2016-18)
As of December 31, 2017, we elected to early-adopt Accounting Standards Update (ASU) 2016-18. The amendments in this update require that amounts classified as restricted cash and restricted cash equivalents be included within the beginning-of-period and end-of-period amounts along with cash and cash equivalents on the statement of cash flows. The amendments were applied retrospectively to all periods presented within the statement of cash flows. The implementation of this guidance resulted in a change in presentation of our Condensed Consolidated Statement of Cash Flows and additional disclosures surrounding restricted cash balances, but did not result in a change to our Condensed Consolidated Statement of Comprehensive Income or Condensed Consolidated Balance Sheet.
Revenue from Contracts with Customers (ASU 2014-09)
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09. The purpose of this guidance is to streamline and consolidate existing revenue recognition principles in GAAP and to converge revenue recognition principles with International Financial Reporting Standards. The core principle of the amendments is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. The amendments include a five step process for consideration of the core principle, guidance on the accounting treatment for costs associated with a contract, and disclosure requirements related to the revenue process. The FASB issued several additional ASUs to clarify guidance and provide implementation support for ASU 2014-09. The clarifying guidance elaborates on the key concepts within ASU 2014-09 and clarifies how those concepts interact with other GAAP requirements. On January 1, 2018, we adopted ASU 2014-09 and all subsequent ASUs that modified ASU 2014-09 (collectively, the amendments to the revenue recognition principles), which have been codified in ASC 606, Revenue from Contracts with Customers, and ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, respectively. We elected to adopt this guidance using the modified retrospective approach applied to all contracts with customers that were not completed as of January 1, 2018. The adoption of the amendments resulted in a reduction to our opening retained earnings of approximately $126 million, net of income taxes. Refer to Note 2 for further details.
Financial Instruments — Recognition and Measurement of Financial Assets (ASU 2016-01)
As of January 1, 2018, we adopted ASU 2016-01. The amendments in this update modify the requirements related to the measurement of certain financial instruments in the statement of financial condition and results of operations. The FASB subsequently issued ASU 2018-03 to clarify guidance and provide implementation support for ASU 2016-01, which we elected to early-adopt as of January 1, 2018, to align with the adoption of ASU 2016-01. For equity investments (other than investments accounted for using the equity method), entities must measure such instruments at fair value with changes in fair value recognized in net income. Changes in fair value for equity securities are no longer recognized through other comprehensive (loss) income, which creates additional volatility in our Condensed Consolidated Statement of Comprehensive Income. Reporting entities may continue to elect to measure certain equity investments that do not have a readily determinable fair value at cost with adjustments for impairment and observable changes in price. In addition, for a liability (other than a derivative liability) that an entity measures at fair value, any change in fair value related to the instrument-specific credit risk, that is the entity’s own-credit, should be presented separately in other comprehensive (loss) income and not as a component of net income. We adopted these amendments, as required, on a modified retrospective basis with a cumulative effect adjustment as of the beginning of the fiscal year of initial adoption. The adoption of the amendments resulted in a reduction to our opening retained earnings of approximately $20 million, net of income taxes.
Derivatives and Hedging — Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)
As of January 1, 2018, we elected to early-adopt ASU 2017-12. The amendments in this update enhance the financial reporting of hedging relationships to better align hedge accounting with an entity’s risk-management activities. This update also makes certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP and better portrays economic results through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. We adopted the amendments to all cash flow and net investment hedge relationships that existed on the date of adoption using a modified retrospective approach. No cumulative effect adjustment to our opening retained earnings was required as a result of the adoption. The presentation and disclosure requirements included in this update were adopted prospectively. Refer to Note 17 for further details.
Accumulated Other Comprehensive Income — Reclassification of Certain Tax Effects (ASU 2018-02)
In February 2018, the FASB issued ASU 2018-02. The amendments in this update provide guidance concerning the treatment of the impact of income tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the Tax Act) on items included in accumulated other comprehensive income. Our policy is to use the portfolio method with respect to reclassification of stranded income tax effects in

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Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


accumulated other comprehensive loss. The amendments in ASU 2018-02 provide entities an election to reclassify the income tax effect of the Tax Act from accumulated other comprehensive income to retained earnings. We elected to early-adopt this standard as of January 1, 2018, and reclassified the effect of the change in the federal corporate income tax rate on items included in accumulated other comprehensive loss. This election resulted in a reclassification of $42 million from accumulated other comprehensive loss to retained earnings.
Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
In August 2018, the FASB issued ASU 2018-13. The amendments in this update modify, remove, and add certain disclosure requirements for fair value measurements based on the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The ASU is effective on January 1, 2020, and early adoption is permitted. The amendments include (i) the removal of certain disclosure requirements related to transfers between fair value input levels and the valuation process for Level 3 fair value measurements, (ii) modification of the disclosures on measurement uncertainty and certain disclosures related to investments in entities that calculate net asset value, and (iii) additional disclosure requirements related to changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The modification of the narrative disclosure on measurement uncertainty, the disclosure of changes in unrealized gains and losses, and disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We elected to early-adopt the amendments that allow for removal and modification of certain disclosure requirements as of September 30, 2018. Refer to Note 19 for further details. We plan to adopt the amendments that require additional fair value measurement disclosures on January 1, 2020, and are currently evaluating the impact these amendments will have to our financial statements.
Recently Issued Accounting Standards
Leases (ASU 2016-02)
In February 2016, the FASB issued ASU 2016-02. The amendments in this update primarily replace the existing accounting requirements for operating leases for lessees. Lessee accounting requirements for finance leases and lessor accounting requirements for operating leases and sales type and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. The amendments require the lessee of an operating lease to record a balance sheet gross-up upon lease commencement by recognizing a right-of-use asset and lease liability equal to the present value of the lease payments. The right-of-use asset and lease liability should be derecognized in a manner that effectively yields a straight line lease expense over the lease term. In addition to the changes to the lessee operating lease accounting requirements, the amendments also change the types of costs that can be capitalized related to a lease agreement for both lessees and lessors. The amendments also require additional disclosures for all lease types for both lessees and lessors. The FASB has subsequently issued additional ASUs intended to clarify guidance, provide implementation support, and provide an additional transition election. The amendments are effective on January 1, 2019, with early adoption permitted. The amendments must be applied on a modified retrospective basis, and we anticipate selecting the transition option that will allow us to record a cumulative adjustment as of the adoption date. We are completing our review of lease contracts and ensuring our control environment and reporting processes reflect the requirements of the amendments. Upon adoption, our balance sheet will include a right-of-use asset and lease liability for our operating leases where we are the lessee, which primarily include our facilities leases. In addition, we will no longer capitalize certain initial direct costs in connection with lease originations where we are the lessor. We anticipate electing certain practical expedients permitted within the ASU that would allow us to not reassess (i) current lease classifications, (ii) whether existing contracts meet the definition of a lease under the amendments to the lease guidance, and (iii) whether current initial direct costs meet the new criteria for capitalization, for all existing leases as of the adoption date. We do not anticipate the adoption of these amendments will have a material impact to our financial statements. We plan to adopt these amendments on January 1, 2019, and expect to use the modified retrospective approach as currently required.
Financial Instruments — Credit Losses (ASU 2016-13)
In June 2016, the FASB issued ASU 2016-13. The amendments in this update introduce a new accounting model to measure credit losses for financial assets measured at amortized cost. Credit losses for financial assets measured at amortized cost should be determined based on the total current expected credit losses over the life of the financial asset or group of financial assets. In effect, the financial asset or group of financial assets should be presented at the net amount expected to be collected. Credit losses will no longer be recorded under the current incurred loss model for financial assets measured at amortized cost. The amendments also modify the accounting for available-for-sale debt securities whereby credit losses will be recorded through an allowance for credit losses rather than a write-down to the security’s cost basis, which allows for reversals of credit losses when estimated credit losses decline. Credit losses for available-for-sale debt securities should be measured in a manner similar to current GAAP. The amendments are effective on January 1, 2020, with early adoption permitted as of January 1, 2019. The amendments must be applied using a modified retrospective approach with a cumulative-effect adjustment through retained earnings as of the beginning of the fiscal year upon adoption. The new accounting model for credit losses represents a significant departure from existing GAAP, and will likely materially increase the allowance for credit losses with a resulting negative adjustment to retained earnings. The amount of the change in the allowance for credit losses will also be impacted by the composition of our portfolio at the adoption date, as well as economic conditions and forecasts at that time. Management created a cross-functional working group to govern the implementation of these amendments, including consideration of model development, data integrity, technology, reporting and disclosure requirements, key accounting interpretations, control environment, and corporate governance. We are in the process of designing and building

13
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


the models and procedures that will be used to calculate the credit loss reserves in accordance with these amendments. We plan to adopt these amendments on January 1, 2020, and expect to use the modified retrospective approach as required.
Receivables — Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)
In March 2017, the FASB issued ASU 2017-08. The amendments in this update require premiums on purchased callable debt securities to be amortized to the security’s earliest call date. Prior to this ASU, premiums and discounts on purchased callable debt securities were generally required to be amortized to the security’s maturity date. The amendments do not require an accounting change for securities held at a discount. The amendments are effective on January 1, 2019, with early adoption permitted. The amendments must be applied using a modified retrospective approach with a cumulative-effect adjustment through retained earnings as of the beginning of the fiscal year upon adoption. While our assessment is not final, we do not expect the amendments to have a material impact to our financial statements and are currently in the process of ensuring our control environment and reporting processes reflect the requirements of the amendments. We plan to adopt these amendments on January 1, 2019, and expect to use the modified retrospective approach as required.
2.    Revenue from Contracts with Customers
On January 1, 2018, we adopted the amendments to the revenue recognition principles using the modified retrospective approach applied to contracts with customers outstanding as of the date of adoption. Results for reporting periods beginning after January 1, 2018, are presented in accordance with the amendments to the revenue recognition principles, while prior period amounts have not been adjusted and continue to be presented in accordance with the accounting standards in effect for those periods. Refer to Note 1 for additional information.
Our primary revenue sources, which include financing revenue and other interest income, are addressed by other GAAP and are not in the scope of the amendments to the revenue recognition principles. As part of our Insurance operations, we recognize revenue from insurance contracts, which are addressed by other GAAP and are not included in the scope of the amendments to the revenue recognition principles. Certain noninsurance contracts within our Insurance operations, including vehicle service contracts (VSCs), guaranteed asset protection (GAP) contracts, and vehicle maintenance contracts (VMCs), are included in the scope of the amendments to the revenue recognition principles. Under the previous guidance, a portion of revenue earned on noninsurance contracts was recognized at contract inception, while the remainder was recognized over the contract term on a basis proportionate to the anticipated cost emergence. In addition, dealer and sales commissions incurred to obtain a noninsurance contract were recognized as expense when incurred, and certain direct-response advertising costs were deferred and recognized as expense over the term of the contract. Upon adoption of the amendments to the revenue recognition principles, all revenue associated with noninsurance contracts is recognized over the contract term on a basis proportionate to the anticipated cost emergence. Further, commissions and sales expense incurred to obtain these contracts are capitalized and recognized as expense over the contract term, and all advertising costs are recognized as expense when incurred.
The following table presents the impact to our Condensed Consolidated Balance Sheet as of January 1, 2018, as a result of adopting the amendments to the revenue recognition principles.
($ in millions)
 
As reported, December 31, 2017
 
Adjustment related to adoption
 
As adjusted, January 1, 2018
Assets
 
 
 
 
 
 
Premiums receivable and other insurance assets
 
$
2,047

 
$
122

 
$
2,169

Other assets
 
5,663

 
41

 
5,704

Total assets
 
$
167,148

 
$
163

 
$
167,311

Liabilities
 
 
 
 
 
 
Unearned insurance premiums and service revenue
 
$
2,604

 
$
289

 
$
2,893

Total liabilities
 
153,654

 
289

 
153,943

Equity
 
 
 
 
 
 
Accumulated deficit
 
(6,406
)
 
(126
)
 
(6,532
)
Total equity
 
13,494

 
(126
)
 
13,368

Total liabilities and equity
 
$
167,148

 
$
163

 
$
167,311


14
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


The following tables present the impact of adopting the amendments to the revenue recognition principles to our Condensed Consolidated Statement of Comprehensive Income and Condensed Consolidated Balance Sheet.
 
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
($ in millions)
 
As reported
 
Effect of adoption
 
As reported
 
Effect of adoption
Other revenue
 
 
 
 
 
 
 
 
Insurance premiums and service revenue earned
 
$
258

 
$
(8
)
 
$
753

 
$
(23
)
Total other revenue
 
398

 
(8
)
 
1,116

 
(23
)
Total net revenue
 
1,505

 
(8
)
 
4,366

 
(23
)
Noninterest expense
 
 
 
 
 
 
 
 
Compensation and benefits expense
 
274

 
—

 
872

 
(2
)
Other operating expenses
 
456

 
(4
)
 
1,347

 
(9
)
Total noninterest expense
 
807

 
(4
)
 
2,460

 
(11
)
Income from continuing operations before income tax expense
 
465

 
(4
)
 
1,254

 
(12
)
Income tax expense from continuing operations
 
91

 
(1
)
 
280

 
(3
)
Net income from continuing operations
 
374

 
(3
)
 
974

 
(9
)
Net income
 
374

 
(3
)
 
973

 
(9
)
Comprehensive income
 
$
241

 
$
(3
)
 
$
442

 
$
(9
)
September 30, 2018 ($ in millions)
 
As reported
 
Effect of adoption
Assets
 
 
 
 
Premiums receivable and other insurance assets
 
$
2,291

 
$
133

Other assets
 
5,796

 
44

Total assets
 
$
173,101

 
$
177

Liabilities
 
 
 
 
Unearned insurance premiums and service revenue
 
$
3,020

 
$
312

Total liabilities
 
160,016

 
312

Equity
 
 
 
 
Accumulated deficit
 
(5,716
)
 
(135
)
Total equity
 
13,085

 
(135
)
Total liabilities and equity
 
$
173,101

 
$
177

The following is a description of our primary revenue sources that are derived from contracts with customers. As a result of the adoption of the amendments to the revenue recognition principles, our only revenue source for which the recognition pattern was affected was that of noninsurance contracts, as described in this note. Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to our customers, and in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. For information regarding our revenue recognition policies outside the scope of the amendments to the revenue recognition principles of ASC 606, Revenue from Contracts with Customers, refer to Note 1 to the Consolidated Financial Statements in our 2017 Annual Report on Form 10-K.
•
Noninsurance contracts — We sell VSCs that offer owners mechanical repair protection and roadside assistance for new and used vehicles beyond the manufacturer’s new vehicle limited warranty. We sell GAP contracts that protect the customer against having to pay certain amounts to a lender above the fair market value of their vehicle if the vehicle is damaged and declared a total loss or stolen. We also sell VMCs that provide coverage for certain agreed-upon services, such as oil changes and tire rotations, over the coverage period. We receive payment in full at the inception of each of these contracts. Our performance obligation for these contracts is satisfied over the term of the contract and we recognize revenue over the contract term on a basis proportionate to the anticipated cost emergence, as we believe this is the most appropriate method to measure progress towards satisfaction of the performance obligation. Upon adoption of the amendments to the revenue recognition principles, unearned revenue of $289 million was recognized as a component of unearned insurance premiums and service revenue on our Condensed Consolidated Balance Sheet associated with outstanding contracts at January 1, 2018, and $24 million and $68 million of this balance were recognized as insurance premiums and service revenue earned in our Condensed Consolidated Statement of Comprehensive Income during the three months and nine months ended September 30, 2018, respectively. At September 30, 2018, we had unearned revenue of

15
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


$2.6 billion associated with outstanding contracts, and with respect to this balance we expect to recognize revenue of $190 million during the remainder of 2018, $696 million in 2019, $610 million in 2020, $479 million in 2021, and $633 million thereafter. The incremental costs to obtain these contracts are initially deferred and recorded as a component of premiums receivable and other insurance assets on our Condensed Consolidated Balance Sheet. These deferred costs are amortized as an expense over the term of the related contract commensurate with how the related revenue is recognized, and are included in compensation and benefits and other operating expenses in our Condensed Consolidated Statement of Comprehensive Income. We had deferred insurance assets of $1.5 billion at September 30, 2018, and recognized $108 million and $317 million of expense during the three months and nine months ended September 30, 2018, respectively.
•
Sale of off-lease vehicles — When a customer’s vehicle lease matures, the customer has the option of purchasing or returning the vehicle. If the vehicle is returned to us, we obtain possession with the intent to sell through SmartAuction—our online auction platform, our dealer channel, or through various other physical auctions. Our performance obligation is satisfied and the remarketing gain or loss is recognized when control of the vehicle has passed to the buyer, which coincides with the sale date. Our actual sales proceeds from remarketing the vehicle may be higher or lower than the estimated residual value resulting in a gain or loss on remarketing recorded through depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income.
•
Remarketing fee income — In addition to using SmartAuction as a remarketing channel for our returned lease vehicles, we maintain the internet auction site and administer the auction process for third-party use. We earn a service fee from dealers for every third-party vehicle sold through SmartAuction. Our performance obligation is to provide the online marketplace for used vehicle transactions to be consummated. This obligation is satisfied and revenue is recognized when control of the vehicle has passed to the buyer, which coincides with the sale date. This revenue is recorded as remarketing fees within other income in our Condensed Consolidated Statement of Comprehensive Income.
•
Brokerage commissions and other revenues through Ally Invest — We charge fees to customers related to their use of certain services on our Ally Invest digital wealth management and online brokerage platform. These fees include commissions on customer-directed trades, account service fees, account management fees on professional portfolio management services, and other ancillary fees. Commissions on customer-directed trades and account service fees are based on published fee schedules and are generated from a customer option to purchase the services offered under the contract. These options do not represent a material right and are only considered a contract when the customer executes their option to purchase these services. Based on this, the term of the contract does not extend beyond services provided, and as such revenue is recognized upon the completion of our performance obligation, which we view as the successful execution of the trade or service. Revenue on professional portfolio management services is calculated monthly based upon a fixed percentage of the client’s assets under management. Due to the fact that this revenue stream is composed of variable consideration that is based on factors outside of our control, we have deemed this revenue as constrained and we are unable to estimate the initial transaction price at the inception of the contract. We have elected to use the practical expedient under GAAP to recognize revenue monthly based on the amount we are able to invoice the customer. We also earn revenue from a fee-sharing agreement with our clearing broker related to the interest income the clearing broker earns on customer cash balances and margin loans made to our customers. Ally concluded the initial transaction price is exclusively variable consideration and, based on the nature of our performance obligation to allow the clearing broker to collect interest income from cash deposits and customer loans from our customers, we are unable to determine the amount of revenue to be recognized until the total customer cash balance or the total interest income recognized on margin loans has been determined, which occurs monthly. These revenue streams are recorded as other income in our Condensed Consolidated Statement of Comprehensive Income.
•
Brokered/agent commissions through Insurance operations — We have agreements with third parties to offer various vehicle protection products to consumers. We also have agreements with third-party insurers to offer various insurance coverages to dealers. Our performance obligation for these arrangements is satisfied when a customer or dealer has purchased a vehicle protection product or an insurance policy through the third-party provider. In determining the initial transaction price for these agreements, we noted that revenue on brokered/agent commissions is based on the volume of vehicle protection product contracts sold or a percentage of insurance premium written, which is not known to Ally at the inception of the agreements with these third-party providers. As such, we believe the initial transaction price is exclusively variable consideration and, based on the nature of the performance obligation, we are unable to determine the amount of revenue we will record until the customer purchases a vehicle protection product or a dealer purchases an insurance policy from the third-party provider. Once we are notified of vehicle protection product sales or insurance policies issued by the third-party providers, we record the commission earned as insurance premiums and service revenues earned in our Condensed Consolidated Statement of Comprehensive Income.
•
Deposit account and other banking fees — We charge depositors various account service fees including those for outgoing wires, excessive transactions, overdrafts, stop payments, and returned deposits. These fees are generated from a customer option to purchase services offered under the contract. These options do not represent a material right and are only considered a contract in accordance with the amendments to the revenue recognition principles when the customer exercises their option to purchase these account services. Based on this, the term for our contracts with customers is considered day-to-day, and the contract does not extend beyond the services already provided. Revenue derived from deposit account fees is recorded at the point in time we perform the requested service, and is recorded as other income in our Condensed Consolidated Statement of Comprehensive Income. As a debit card issuer, we also generate interchange fee income from merchants during debit card transactions and incur certain corresponding charges from merchant card networks. Our performance obligation is satisfied when we have initiated the payment of funds from a

16
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


customer’s account to a merchant through our contractual agreements with the merchant card networks. Interchange fees are reported on a net basis as other income in our Condensed Consolidated Statement of Comprehensive Income. Gross interchange fee income was $3 million and $9 million, and interchange expense was $2 million and $7 million, for the three months and nine months ended September 30, 2018, respectively.
•
Other revenue — Other revenue primarily includes service revenue related to various account management functions, fee income derived from third-party loans arranged through Clearlane—our online automotive lender exchange, and revenue associated with licensing and marketing from the Ally CashBack Credit Card—our co-branded credit card. These revenue streams are recorded as other income in our Condensed Consolidated Statement of Comprehensive Income.
The following table presents a disaggregated view of our revenue from contracts with customers included in other revenue that falls within the scope of the amendments to the revenue recognition principles.
Three months ended September 30, 2018 ($ in millions)
 
Automotive Finance operations
 
Insurance operations
 
Mortgage Finance operations
 
Corporate Finance operations
 
Corporate and Other
 
Consolidated
Revenue from contracts with customers
 
 
 
 
 
 
 
 
 
 
 
 
Noninsurance contracts
 
$
—

 
$
129

 
$
—

 
$
—

 
$
—

 
$
129

Remarketing fee income
 
19

 
—

 
—

 
—

 
—

 
19

Brokerage commissions and other revenue
 
—

 
—

 
—

 
—

 
15

 
15

Brokered/agent commissions
 
—

 
3

 
—

 
—

 
—

 
3

Deposit account and other banking fees
 
—

 
—

 
—

 
—

 
3

 
3

Other
 
4

 
—

 
—

 
—

 
—

 
4

Total revenue from contracts with customers
 
23

 
132

 
—

 
—

 
18

 
173

All other revenue
 
57

 
150

 
2

 
14

 
2

 
225

Total other revenue (a)
 
$
80

 
$
282

 
$
2

 
$
14

 
$
20

 
$
398

(a)
Represents a component of total net revenue. Refer to Note 21 for further information on our reportable operating segments.
Nine months ended September 30, 2018 ($ in millions)
 
Automotive Finance operations
 
Insurance operations
 
Mortgage Finance operations
 
Corporate Finance operations
 
Corporate and Other
 
Consolidated
Revenue from contracts with customers
 
 
 
 
 
 
 
 
 
 
 
 
Noninsurance contracts
 
$
—

 
$
377

 
$
—

 
$
—

 
$
—

 
$
377

Remarketing fee income
 
63

 
—

 
—

 
—

 
—

 
63

Brokerage commissions and other revenue
 
—

 
—

 
—

 
—

 
46

 
46

Brokered/agent commissions
 
—

 
11

 
—

 
—

 
—

 
11

Deposit account and other banking fees
 
—

 
—

 
—

 
—

 
9

 
9

Other
 
10

 
1

 
—

 
—

 
—

 
11

Total revenue from contracts with customers
 
73

 
389

 
—

 
—

 
55

 
517

All other revenue
 
136

 
405

 
5

 
36

 
17

 
599

Total other revenue (a)
 
$
209

 
$
794

 
$
5

 
$
36

 
$
72

 
$
1,116

(a)
Represents a component of total net revenue. Refer to Note 21 for further information on our reportable operating segments.
In addition to the components of other revenue presented above, as part of our Automotive Finance operations, we recognized net remarketing gains of $27 million and $61 million for the three months and nine months ended September 30, 2018, respectively, on the sale of off-lease vehicles. These gains are included in depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income.

17
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


3.    Other Income, Net of Losses
Details of other income, net of losses, were as follows.
 
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
 
2018
 
2017
 
2018
 
2017
Late charges and other administrative fees
 
$
29

 
$
25

 
$
83

 
$
77

Remarketing fees
 
19

 
26

 
63

 
82

Servicing fees
 
5

 
11

 
21

 
41

Income from equity-method investments
 
5

 
7

 
18

 
12

Other, net
 
43

 
22

 
122

 
95

Total other income, net of losses
 
$
101


$
91


$
307


$
307

4.    Reserves for Insurance Losses and Loss Adjustment Expenses
The following table shows a rollforward of our reserves for insurance losses and loss adjustment expenses.
($ in millions)
 
2018
 
2017
Total gross reserves for insurance losses and loss adjustment expenses at January 1,
 
$
140

 
$
149

Less: Reinsurance recoverable
 
108

 
108

Net reserves for insurance losses and loss adjustment expenses at January 1,
 
32

 
41

Net insurance losses and loss adjustment expenses incurred related to:
 
 
 
 
Current year
 
235

 
276

Prior years (a)
 
6

 
2

Total net insurance losses and loss adjustment expenses incurred
 
241

 
278

Net insurance losses and loss adjustment expenses paid or payable related to:
 
 
 
 
Current year
 
(205
)
 
(248
)
Prior years
 
(27
)
 
(31
)
Total net insurance losses and loss adjustment expenses paid or payable
 
(232
)
 
(279
)
Foreign exchange and other
 
—

 
1

Net reserves for insurance losses and loss adjustment expenses at September 30,
 
41

 
41

Plus: Reinsurance recoverable
 
98

 
132

Total gross reserves for insurance losses and loss adjustment expenses at September 30,
 
$
139

 
$
173

(a)
There have been no material adverse changes to the reserve for prior years.

18
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


5.    Other Operating Expenses
Details of other operating expenses were as follows.
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Insurance commissions
$
113

 
$
106

 
$
332

 
$
309

Technology and communications
75

 
72

 
220

 
212

Lease and loan administration
42

 
41

 
124

 
116

Advertising and marketing
38

 
33

 
106

 
96

Professional services
33

 
28

 
100

 
81

Regulatory and licensing fees
33

 
27

 
98

 
82

Vehicle remarketing and repossession
27

 
29

 
85

 
82

Premises and equipment depreciation
22

 
22

 
64

 
67

Occupancy
11

 
11

 
33

 
34

Non-income taxes
10

 
6

 
24

 
22

Amortization of intangible assets
2

 
2

 
8

 
8

Other
50

 
47

 
153

 
140

Total other operating expenses
$
456

 
$
424

 
$
1,347

 
$
1,249


19
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


6.    Investment Securities
Our investment portfolio includes various debt and equity securities. Our debt securities, which are classified as available-for-sale and held-to-maturity, include government securities, corporate bonds, asset-backed securities, and mortgage-backed securities. The cost, fair value, and gross unrealized gains and losses on available-for-sale and held-to-maturity debt securities were as follows.
 
 
September 30, 2018
 
December 31, 2017


Amortized cost

Gross unrealized

Fair value

Amortized cost

Gross unrealized

Fair value
($ in millions)

gains

losses

gains

losses

Available-for-sale securities
















Debt securities
















U.S. Treasury and federal agencies

$
2,007


$
—


$
(103
)

$
1,904


$
1,831


$
—


$
(54
)

$
1,777

U.S. States and political subdivisions

887


4


(26
)

865


850


11


(7
)

854

Foreign government

158


—


(3
)

155


153


2


(1
)

154

Agency mortgage-backed residential

16,641


2


(629
)

16,014


14,412


35


(156
)

14,291

Mortgage-backed residential
 
2,670

 
1

 
(110
)
 
2,561

 
2,517

 
11

 
(34
)
 
2,494

Mortgage-backed commercial

632


1


(2
)

631


541


1


(1
)

541

Asset-backed

735


1


(3
)

733


933


4


(1
)

936

Corporate debt

1,302


—


(43
)

1,259


1,262


5


(11
)

1,256

Total available-for-sale securities (a) (b) (c)

$
25,032


$
9


$
(919
)

$
24,122


$
22,499


$
69


$
(265
)

$
22,303

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency mortgage-backed residential (d)
 
$
2,197

 
$
—

 
$
(107
)
 
$
2,090

 
$
1,863

 
$
3

 
$
(37
)
 
$
1,829

Asset-backed retained notes
 
49

 
—

 
—

 
49

 
36

 
—

 
—

 
36

Total held-to-maturity securities

$
2,246


$
—


$
(107
)

$
2,139


$
1,899

 
$
3

 
$
(37
)
 
$
1,865

(a)
Certain entities related to our Insurance operations are required to deposit securities with state regulatory authorities. These deposited securities totaled $12 million at both September 30, 2018, and December 31, 2017.
(b)
Certain available-for-sale securities are included in fair value hedging relationships. Refer to Note 17 for additional information.
(c)
Available-for-sale securities with a fair value of $5.5 billion and $7.8 billion at September 30, 2018, and December 31, 2017, respectively, were pledged to secure advances from the FHLB, short-term borrowings or repurchase agreements, or for other purposes as required by contractual obligation or law. Under these agreements, we have granted the counterparty the right to sell or pledge $1.4 billion and $1.0 billion of the underlying investment securities at September 30, 2018, and December 31, 2017, respectively.
(d)
Held-to-maturity securities with a fair value of $992 million and $664 million at September 30, 2018, and December 31, 2017, respectively, were pledged to secure advances from the FHLB.

20
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


The maturity distribution of debt securities outstanding is summarized in the following tables. Call or prepayment options may cause actual maturities to differ from contractual maturities.


Total

Due in one year or less

Due after one year through five years

Due after five years through ten years

Due after ten years
($ in millions)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield
September 30, 2018




















Fair value of available-for-sale securities (a)




















U.S. Treasury and federal agencies

$
1,904


1.9
%

$
7


1.7
%

$
932


1.9
%

$
965


1.9
%

$
—


—
%
U.S. States and political subdivisions

865


3.1


44


2.5


57


2.4


257


2.6


507


3.5

Foreign government

155


2.5


18


3.4


61


2.3


73


2.4


3


2.9

Agency mortgage-backed residential
 
16,014

 
3.2

 
—

 
—

 
—

 
—

 
56

 
1.9

 
15,958

 
3.2

Mortgage-backed residential

2,561


3.2


—


—


—


—


—


—


2,561


3.2

Mortgage-backed commercial

631


3.6


—


—


3


3.0


46


3.6


582


3.6

Asset-backed

733


3.3


—


—


533


3.3


99


3.7


101


3.0

Corporate debt

1,259


3.1


134


2.9


515


2.8


582


3.3


28


5.1

Total available-for-sale securities

$
24,122


3.1


$
203


2.8


$
2,101


2.5


$
2,078


2.5


$
19,740


3.3

Amortized cost of available-for-sale securities

$
25,032




$
203




$
2,154




$
2,181




$
20,494



Amortized cost of held-to-maturity securities
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency mortgage-backed residential
 
$
2,197

 
3.2
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
2,197

 
3.2
%
Asset-backed retained notes
 
49

 
2.0

 
—

 
—

 
48

 
2.0

 
1

 
3.3

 
—

 
—

Total held-to-maturity securities
 
$
2,246

 
3.1

 
$
—

 
—

 
$
48

 
2.0

 
$
1

 
3.3

 
$
2,197

 
3.2

December 31, 2017




















Fair value of available-for-sale securities (a)




















U.S. Treasury and federal agencies

$
1,777


1.7
%

$
—


—
%

$
487


1.7
%

$
1,290


1.8
%

$
—


—
%
U.S. States and political subdivisions

854


2.9


76


1.8


36


2.3


203


2.5


539


3.3

Foreign government

154


2.5


—


—


80


2.5


74


2.4


—


—

Agency mortgage-backed residential
 
14,291

 
3.1

 
—

 
—

 
—

 
—

 
3

 
2.9

 
14,288

 
3.1

Mortgage-backed residential

2,494


3.1


—


—


—


—


—


—


2,494


3.1

Mortgage-backed commercial

541


3.2


—


—


30


3.1


31


3.1


480


3.2

Asset-backed

936


3.1


—


—


698


3.1


106


3.1


132


2.8

Corporate debt

1,256


2.9


140


2.6


513


2.6


564


3.2


39


4.7

Total available-for-sale securities

$
22,303


3.0


$
216


2.3


$
1,844


2.5


$
2,271


2.3


$
17,972


3.1

Amortized cost of available-for-sale securities

$
22,499





$
217





$
1,852





$
2,314





$
18,116




Amortized cost of held-to-maturity securities

 






















Agency mortgage-backed residential
 
$
1,863

 
3.1
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
1,863

 
3.1
%
Asset-backed retained notes
 
36

 
1.7

 
—

 
—

 
35

 
1.7

 
1

 
3.0

 
—

 
—

Total held-to-maturity securities
 
$
1,899

 
3.1

 
$
—

 
—

 
$
35

 
1.7

 
$
1

 
3.0

 
$
1,863

 
3.1

(a)
Yield is calculated using the effective yield of each security at the end of the period, weighted based on the market value. The effective yield considers the contractual coupon and amortized cost, and excludes expected capital gains and losses.

21
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


The balances of cash equivalents were $54 million and $10 million at September 30, 2018, and December 31, 2017, respectively, and were composed primarily of money market accounts and short-term securities, including U.S. Treasury bills.
The following table presents interest and dividends on investment securities.
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Taxable interest
$
172


$
141

 
$
490

 
$
390

Taxable dividends
4


3

 
10

 
8

Interest and dividends exempt from U.S. federal income tax
6


6

 
18

 
17

Interest and dividends on investment securities
$
182


$
150

 
$
518

 
$
415

The following table presents gross gains and losses realized upon the sales of available-for-sale securities, and net gains or losses on equity securities held during the period. There were no other-than-temporary impairments of available-for-sale securities for either period.
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Available-for-sale securities
 
 
 
 
 
 
 
Gross realized gains
$
1

 
$
24

 
$
8

 
$
75

Gross realized losses (a)
—

 
(1
)
 
—

 
(2
)
Net realized gains on available-for-sale securities
1

 
23

 
8

 
73

Net realized gain on equity securities
15

 
 
 
55

 
 
Net unrealized gain (loss) on equity securities (b)
6

 
 
 
(26
)
 
 
Other gain on investments, net
$
22

 
$
23

 
$
37

 
$
73

(a)
Certain available-for-sale securities were sold at a loss in 2018 and 2017 as a result of market conditions within these respective periods (e.g., a downgrade in the rating of a debt security). Any such sales were made in accordance with our risk-management policies and practices.
(b)
As a result of our adoption of ASU 2016-01, beginning January 1, 2018, changes in the fair value of our portfolio of equity securities are recognized in net income. Prior to adoption, equity securities were included in our available-for-sale portfolio and unrealized changes in fair value were recognized through other comprehensive (loss) income until realized, at which point we recorded a gain or loss on sale. We adopted ASU 2016-01 on January 1, 2018, on a modified retrospective basis with a cumulative effect adjustment as of the beginning of the fiscal year of initial adoption. Refer to the section titled Recently Adopted Accounting Standards in Note 1 for additional information.

22
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


The table below summarizes available-for-sale and held-to-maturity securities in an unrealized loss position, which we evaluated for other than temporary impairment applying the methodology described in Note 1. As of September 30, 2018, we did not have the intent to sell the available-for-sale or held-to-maturity securities with an unrealized loss position and we do not believe it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. As a result of this evaluation, we believe that the securities with an unrealized loss position are not considered to be other-than-temporarily impaired at September 30, 2018.
 
 
September 30, 2018
 
December 31, 2017


Less than 12 months

12 months or longer

Less than 12 months

12 months or longer
($ in millions)

Fair value

Unrealized loss

Fair value

Unrealized loss

Fair value

Unrealized loss

Fair value

Unrealized loss
Available-for-sale securities
















Debt securities
















U.S. Treasury and federal agencies

$
268


$
(5
)

$
1,635


$
(98
)

$
471


$
(8
)

$
1,305


$
(46
)
U.S. States and political subdivisions

504


(12
)

211


(14
)

242


(2
)

183


(5
)
Foreign government

73


(2
)

30


(1
)

80


(1
)

4


—

Agency mortgage-backed residential
 
9,600

 
(258
)
 
5,991

 
(371
)
 
4,066

 
(19
)
 
5,671

 
(137
)
Mortgage-backed residential

1,701


(49
)

711


(61
)

857


(2
)

773


(32
)
Mortgage-backed commercial
 
60

 
(1
)
 
20

 
(1
)
 
76

 
(1
)
 
21

 
—

Asset-backed

410


(2
)

76


(1
)

220


(1
)

91


—

Corporate debt

897


(23
)

312


(20
)

529


(4
)

194


(7
)
Total temporarily impaired available-for-sale securities

$
13,513


$
(352
)

$
8,986


$
(567
)

$
6,541


$
(38
)

$
8,242


$
(227
)
Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency mortgage-backed residential
 
$
940

 
$
(25
)
 
$
1,116

 
$
(82
)
 
$
773

 
$
(5
)
 
$
687

 
$
(32
)
Asset-backed retained notes
 
22

 
—

 
17

 
—

 
35

 
—

 
—

 
—

Total held-to-maturity debt securities
 
$
962


$
(25
)

$
1,133


$
(82
)

$
808


$
(5
)

$
687


$
(32
)

23
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


7.    Finance Receivables and Loans, Net
The composition of finance receivables and loans reported at gross carrying value was as follows.
($ in millions)
 
September 30, 2018
 
December 31, 2017
Consumer automotive (a)
 
$
69,995

 
$
68,071

Consumer mortgage
 
 
 
 
Mortgage Finance (b)
 
14,840

 
11,657

Mortgage — Legacy (c)
 
1,666

 
2,093

Total consumer mortgage
 
16,506

 
13,750

Total consumer
 
86,501

 
81,821

Commercial
 
 
 
 
Commercial and industrial
 
 
 
 
Automotive
 
31,424

 
33,025

Other
 
4,132

 
3,887

Commercial real estate
 
4,548

 
4,160

Total commercial
 
40,104

 
41,072

Total finance receivables and loans (d)
 
$
126,605

 
$
122,893

(a)
Certain finance receivables and loans are included in fair value hedging relationships. Refer to Note 17 for additional information.
(b)
Includes loans originated as interest-only mortgage loans of $16 million and $20 million at September 30, 2018, and December 31, 2017, respectively, 38% of which are expected to start principal amortization in 2019, and 45% in 2020. The remainder of these loans has exited the interest-only period.
(c)
Includes loans originated as interest-only mortgage loans of $381 million and $496 million at September 30, 2018, and December 31, 2017, respectively, of which 99% have exited the interest-only period.
(d)
Totals include net unearned income, unamortized premiums and discounts, and deferred fees and costs of $606 million and $551 million at September 30, 2018, and December 31, 2017, respectively.
The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans.
Three months ended September 30, 2018 ($ in millions)
 
Consumer automotive
 
Consumer mortgage
 
Commercial
 
Total
Allowance at July 1, 2018
 
$
1,053

 
$
66

 
$
138

 
$
1,257

Charge-offs (a)
 
(343
)
 
(7
)
 
(3
)
 
(353
)
Recoveries
 
110

 
8

 
—

 
118

Net charge-offs
 
(233
)
 
1

 
(3
)
 
(235
)
Provision for loan losses
 
229

 
(4
)
 
8

 
233

Other (b)
 
(6
)
 
1

 
(2
)
 
(7
)
Allowance at September 30, 2018
 
$
1,043


$
64


$
141


$
1,248

(a)
Represents the amount of the gross carrying value directly written off. For consumer and commercial loans, the loss from a charge-off is measured as the difference between the gross carrying value of a loan and the fair value of the collateral, less costs to sell. Refer to Note 1 to the Consolidated Financial Statements in our 2017 Annual Report on Form 10-K for more information regarding our charge-off policies.
(b)
Primarily related to the transfer of finance receivables and loans from held-for-investment to held-for-sale.
Three months ended September 30, 2017 ($ in millions)
 
Consumer automotive
 
Consumer mortgage
 
Commercial
 
Total
Allowance at July 1, 2017
 
$
1,002

 
$
83

 
$
140

 
$
1,225

Charge-offs (a)
 
(327
)
 
(7
)
 
(10
)
 
(344
)
Recoveries
 
85

 
6

 
—

 
91

Net charge-offs
 
(242
)

(1
)

(10
)
 
(253
)
Provision for loan losses
 
314

 
—

 
—

 
314

Other
 
—

 
(1
)
 
1

 
—

Allowance at September 30, 2017
 
$
1,074


$
81


$
131


$
1,286

(a)
Represents the amount of the gross carrying value directly written off. For consumer and commercial loans, the loss from a charge-off is measured as the difference between the gross carrying value of a loan and the fair value of the collateral, less costs to sell. Refer to Note 1 to the Consolidated Financial Statements in our 2017 Annual Report on Form 10-K for more information regarding our charge-off policies.

24
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q


Nine months ended September 30, 2018 ($ in millions)
 
Consumer automotive
 
Consumer mortgage
 
Commercial
 
Total
Allowance at January 1, 2018

$
1,066


$
79


$
131


$
1,276

Charge-offs (a)

(1,004
)

(27
)

(5
)

(1,036
)
Recoveries

336


20


6


362

Net charge-offs

(668
)

(7
)

1


(674
)
Provision for loan losses

650


(7
)

9


652

Other (b)

(5
)

(1
)

—


(6
)
Allowance at September 30, 2018

$
1,043

 
$
64

 
$
141


$
1,248

Allowance for loan losses at September 30, 2018








Individually evaluated for impairment

$
43


$
24


$
35


$
102

Collectively evaluated for impairment